Construction law update: review of NZS 3910:2013 conditions of contract for building and civil engineering construction

Friday 22 November 2013

Authors: Tom Bennett and Paula Ormandy

On 1 October 2013, Standards New Zealand issued the new NZS3910:2013 Conditions o​f Contract for Building and Civil Engineering Construction (the 2013 revision). The 2013 revision partially replaces the NZS 3910:2003, together with two other new NZS Conditions of Contract that are due to be issued later on this year. The other two NZS Conditions of Contract are for:

  • design and construction - NZS 3916 Conditions of Contract for Building and Civil Engineering – Design and Construction; and

  • term maintenance - NZS 3917 Conditions of Contract for Building and Civil Engineering – Term Maintenance.

The 2013 revision incorporates a number of changes that typically have been included in the special conditions, and so tends to reflect market practice. As a result, clients will have to update any "standard" special conditions to reflect the 2013 revision.

In summary, some key changes in the 2013 revision include:

  1. Outcome statement: A new outcome statement identifies that contracts based on the 2013 revision will reflect a fair risk allocation between parties. The purpose of the 2013 revision is to allow principals, engineers and contractors to quickly establish contractual arrangements that are applicable to a wide range of building and civil engineering projects.

  2. Cost reimbursement contracts: Detailed provisions relating to cost reimbursement contracts have been included in the 2013 revision. These replace the previous clauses in NZS 3910:2003 that required the method of reimbursement to the contractor to be dealt with under the special conditions. There is now a reasonableness element to the definition of "Net Cost", i.e. the reasonable actual or assessed expense to the contractor, rather than actual or assessed expense incurred.

    Under the 2013 revision, the contract price is based on net cost for the execution of contract works (including labour, materials, plant and subcontractors) and allowances for on-site overheads, off-site overheads and profit. However, if the contract contains rates for any item, those rates must be used instead of the net cost. If rates are used, allowances for on-site overheads, off-overheads and profit are only made to the extent that the relevant rates do not make allowance for such amounts.

    The contractor is not entitled to reimbursement if any cost is not justified by the contractor's records or was not reasonably and actually incurred in carrying out the contract works. In addition, the contractor cannot claim reimbursement for costs incurred due to the contractor's default or by the contractor in preparing a claim against the principal under the dispute resolution provisions.

    An open-book approach has been included in the 2013 revision, requiring the contractor to maintain records of costs incurred, which can be inspected by the engineer. If the special conditions are amended to require an indicative estimate of the contract price from the contractor, then each payment claim must also include:

    • a reconciliation of the claim against the relevant estimate;

    • an explanation of any differences between the estimate and the reconciliation amount; and

    • an amended estimate of the final contract price.

  3. Assignment: The 2013 revision requires counterparty consent for assignment of part or all of the contract (not to unreasonably withheld). A deemed assignment provision for effective change of control for the contractor has also been included. An assignment does not release the assigning party of any liability or obligation under the contract (unless the relevant consent specifically allows for this).

  4. Contractor's bond: Under the 2013 revision, the contractor's bond cannot be called upon when:

    • the contractor fulfils its obligations under the contract up to practical completion;

    • if the contractor has paid any damages to the principal for the contractor's default up to practical completion (or the termination of the contract); or

    • if the practical completion certificate has been issued.

    These restrictions were previously included in the NZS 3910:2003 form of contractor's bond, although were not always specified in an on-demand bond typically required by a principal.

    There is now an obligation on the principal to deliver the contractor's bond back to the contractor within 5 working days from the date that the practical completion certificate is received. In relation to expiry dates, the 2013 revision expressly provides that a contractor's bond will not have an expiry date unless agreed by the principal. Where an expiry date is included in the contractor's bond, the contractor must provide a replacement bond at least one month before the expiry date.

  5. Care of works and site: There are specific obligations on the contractor if any loss or damage occurs while the contractor is responsible for the works and the site. The contractor must urgently attend to any safety or environmental matters and notify the engineer of the loss or damage (allowing the engineer reasonable time to inspect the loss or damage). As a matter of market practice, principals have tended to include these requirements in special conditions.

  6. Comprehensive Programme: Under the 2013 revision, a programme is a mandatory requirement. The contractor is not entitled to payment if the programme is not provided. The special conditions can also require the provision of a "Comprehensive Programme" (as defined in the general conditions). Again, the inclusion of a programme (including the requirements of a comprehensive programme) accords with current market practice.

  7. Advance notice: The 2013 revision now contains an advance notification provision, which requires the contractor and engineer to notify each other in writing as soon as that party becomes aware of any matter likely to materially alter the contract price, materially delay completion of the contract works or result in a breach of statutory duty related to the contract works. Failure to provide such notice may have valuation implications, e.g. if a change entitles the contractor to a variation, but the costs of the variation would have been reduced if the notification had been provided earlier.

  8. Compliance with laws: The 2013 revision clarifies which licences (consents, code compliance certificates, etc) each party is responsible for under the contract. If a licence is issued subject to conditions, the engineer will must either:

    • instruct the contractor to carry out contract works subject to the conditions; or

    • instruct a change in the design of the contract works and obtain different or modified licences that either contain conditions acceptable to the principal or have no conditions relating to the design.

    If delay is caused by the engineer's instructions due to a licence obtained by the principal or conditions relating to the design and specification of the contract (which could not have been forseen when tendering) this will be treated as a variation.

  9. Insurance: There have been changes to the insurance provisions following recent changes to insurance market evaluation of risk and the availability of insurance. Generally, the special conditions must now specify the events which are to be insured by each party. The insuring party is responsible for the excess/deductible, unless the principal is insuring and the loss or damage arose due to the contractor's default. In that case, the contractor is responsible for the "Nominal Deductible" (which cannot be more than the insurance deductible or excess).

  10. Variations: The 2013 revision amends the variation provisions so that oral notice by the contractor in relation to whether a matter should be treated as a variation is not sufficient. The process around the valuation of variations has been amended so that the contractor notifies the engineer of the proposed value of the variation with sufficient information for the Engineer to assess the value of the variation. The 2013 revision also clarifies the calculation of time-related cost which a contractor is entitled to due to an extension of time by the net effect of a variation.

  11. Extension of time: Any default by the principal or the principal's agent has now expressly been included as an event for which a contractor is entitled to an extension of time. This is consistent with other international standard construction contracts and removes an anomaly under the NZS 3910:2003 which placed reliance on the guidelines for granting an extension of time for default by the principal.

  12. Payment: The process for payment claims has been simplified. There is no longer a requirement for the issue of a separate provisional payment schedule and a separate progress payment schedule in relation to each payment claim. Instead, the provisional progress payment schedule:

    • is deemed to be the actual progress payment schedule if the principal does not notify the engineer of any amendments within 12 working days from when the engineer first received the payment claim; or

    • is replaced by a replacement progress payment schedule issued by the engineer, if the principal requires deductions to the sum certified by the engineer.

  13. Provisional items: The 2013 revision allows for provisional items for individual elements of work with rates against the nominated quantities included in the schedule of prices. The amount payable for a provisional item is calculated according to the measurable quantity of work which has been calculated by the engineer.

  14. Guidelines: The guidelines to the 2013 revision no longer have contractual status. The contract now provides that the purpose of the guidelines is to help users understand the principles behind substantive clauses and highlight clause that impose particular obligations on a party.

  15. Changes to the format of the contract: The contract agreement has been shifted from the second schedule to the front of the 2013 revision, which reflects the way construction contracts are generally drafted (by lawyers at least). The 2013 revision includes a number of new forms, which parties previously drafted themselves, including a form of contractor or subcontractor warranty, agreement for off-site materials, practical completion certificate and final completion certificate. There have also been changes to certain terminology, with "Defects Liability Period" being replaced with the term "Defects Notification Period" and the "Defects Liability Certificate" renamed the "Final Completion Certificate". The contract and drawings and specifications are to be provided in electronic form (as specified in the special conditions) along with an executed set, two sets of hard copies and two hard copies of any additional consents. Notice by email is now acceptable.

If you would like to discuss the changes please contact your usual Bell Gully advisor or a member of our Infrastructure and Projects Group.


Disclaimer

This publication is necessarily brief and general in nature. You should seek professional advice before taking any action in relation to the matters dealt with in this publication.

Related areas of expertise
  • Construction
  • Infrastructure and projects